<PAGE>

                                                                      EXHIBIT 13

                       SALEM COMMUNITY BANKSHARES, INC.

                      2000 Annual Report to Stockholders
<PAGE>

To our Stockholders:


The year 2000 was a successful and eventful year as Salem Bank and Trust posted
strong earnings and significant growth. Additional highlights include the
opening of our new branch at Brandon Oaks, the formation of Salem Community
Bankshares, and our investment in a network of full service insurance agencies.

Total assets grew to $212,382,000 at December 31, 2000 which is an increase of
almost 18 percent for the year. Loans increased over 19 percent and deposits
grew over 15 percent. Net income totaled $2,472,000 for the year 2000 compared
to $2,219,000 for 1999. Stockholders' equity increased by $1,922,000 and your
Board of Directors was able to declare an increase in the cash portion of our
dividends. In summary, we are proud of our performance during the year as double
digit increases were posted in all key areas of growth and earnings. This is
especially significant in view of the dismal outlook by many concerning
potential "Y2K" problems entering the year.

The outlook for 2001 is filled with the probability of significant change. A new
administration in Washington, rapidly declining interest rates, and a
recessionary economy will provide changes and challenges for our organization
during the months ahead. We are hopeful of continued success with the loyal
support of our stockholders and dedicated effort of our staff.



Dr. Walter A. Hunt
Chairman of the Board



Clark Owen, Jr.
President and Chief Executive Officer

                                       1
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
            Selected Historical Consolidated Financial Information
          (In Thousands, Except Shares and Per Share Data and Ratios)


<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                        --------------------------------------------------------------------------------------------
                                                  2000              1999             1998              1997               1996
                                        --------------------  ----------------   -------------    ---------------    ---------------
<S>                                     <C>                        <C>              <C>                <C>               <C>
STATEMENT OF INCOME DATA:
    Total interest income               $        16,303             13,505          11,894             10,699             9,850
    Total interest expense                        8,413              6,504           5,689              5,032             4,746
    Net interest income                           7,570              7,001           6,205              5,667             5,104
    Provision for loan losses                       320                315             358                391               193
    Total noninterest income                      1,205              1,137           1,125              1,013               877
    Total noninterest expense                     5,093              4,584           4,404              4,364             3,963
    Income tax expense                            1,210              1,020             777                539               498
    Net income                                    2,472              2,219           1,791              1,386             1,327

PER SHARE DATA (1):
    Net income                          $          1.55               1.40            1.14                .89               .86
    Net income - assuming dilution      $          1.54               1.38            1.11                .87               .83
    Cash dividends                      $           .48                .38             .34                .29               .25
    Stock dividends                                   4%                 4%              4%                 4%                3%
    Book value                          $         12.37              11.69           11.17              10.70             10.35
    Weighted average shares
       outstanding                            1,590,824          1,581,102       1,570,882          1,560,814         1,550,896
    Weighted average shares
       outstanding - assuming dilution        1,603,825          1,603,572       1,607,533          1,600,440         1,593,731

BALANCE SHEET DATA:
    Federal funds sold and securities
       purchased under resale
       agreements                       $        12,310                 --          10,180              6,445               975
    Securities available-for-sale                 9,019              9,376           2,920              5,903             9,909
    Securities held-to-maturity                  39,434             41,456          38,777             16,242            14,995
    Loans, net                                  138,048            115,593          98,404             97,320            86,405
    Total assets                                212,382            180,276         162,583            136,373           123,513
    Total deposits                              180,983            156,864         145,359            120,433           109,127
    Total stockholders' equity                   19,759             17,837          16,292             14,905            13,771

SELECTED RATIOS:
    Return on average assets                       1.25               1.28            1.22               1.06              1.08
    Return on average equity                      12.97              12.77           11.32               9.51              9.93
    Dividend payout ratio                         31.51              28.03           29.26              32.25             29.62
    Average equity to average assets               9.61              10.01           10.74              11.20             10.88
    Allowance for loan losses to loans,
       net of unearned income                      1.10               1.20            1.29               1.22              1.33
</TABLE>

(1)  All prior-period weighted average shares outstanding, net income per share
     and cash dividends per share data has been restated to reflect the
     Company's stock dividends.

                                       2
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                        Market Price and Dividend Data

               (In Thousands, Except Shares and Per Share Data)


     Salem Community Bankshares, Inc. ("Bankshares") has only one class of
common stock, no par value. On September 7, 2000, Bankshares' common stock was
approved for listing on the OTC Bulletin Board, and began trading on the
Bulletin Board under the symbol "SCMY" on September 11, 2000. Salem Community
Bankshares, Inc., a Virginia corporation, was incorporated under the laws of the
Commonwealth of Virginia on May 28, 1999, primarily to serve as a holding
company for Salem Bank and Trust, N.A., (the "Bank") (collectively, the
"Company"), a full service commercial bank. Effective on September 11, 2000, the
Bank became a wholly-owned subsidiary of Bankshares, a reorganization which has
been accounted for as a pooling-of-interests. Prior to September 11, 2000, the
Bank's common stock was traded on the Bulletin Board under the symbol "SMVA."
McKinnon & Company, Inc., Monroe Securities, Inc., Scott & Stringfellow,
Davenport and Co., LLC, Hill, Thompson, Magid & Co., Ryan Beck & Co. and Baird,
Patrick & Co., Inc. were the principal market makers in Bankshares' common stock
at December 31, 2000.

As of December 31, 2000, there were 602 stockholders of record holding 1,596,873
shares of the authorized 10,000,000 shares. The high and low bid prices of
Bankshares' and the Bank's common stock during 2000 and 1999 were as follows:

<TABLE>
<CAPTION>
                                                                                                              Cash Dividends
                                                    Common Stock Market Prices                                 Per Share (1)
                                     --------------------------------------------------------------   ------------------------------
                                               2000                            1999                        2000            1999
                                     ---------------------------   --------------------------------   ---------------  -------------
                                        High           Low             High              Low
                                     ------------   ------------   ---------------   --------------
<S>                                  <C>            <C>            <C>               <C>              <C>              <C>
First Quarter                           15.50          12.13             18.00            16.00                --             --
Second Quarter                          14.25          12.13             17.00            15.82                --             --
Third Quarter                           15.00          13.63             17.75            16.25                --             --
Fourth Quarter                          15.00          13.25             18.75            14.00               .48            .38
</TABLE>

(1)  Prior-period cash dividends per share have been restated to reflect stock
dividends.

No attempt has been made by the Company to verify the accuracy of the above
common stock market prices. The Company expects to continue to pay dividends in
the future based on its income.

                                       3
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC AND SUBSIDIARY
  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
              Three Years Ended December 31, 2000, 1999 and 1998
          (In Thousands, Except Shares and Per Share Data and Ratios)


The following is a discussion of the factors which significantly affected the
financial condition and results of operations of the Company at December 31,
2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998. This
discussion should be read in conjunction with the consolidated financial
statements, statistical disclosures and other financial information presented
herein.

                             2000 COMPARED TO 1999
                             ---------------------

                                 BALANCE SHEET

Total assets of the Company at December 31, 2000 exceeded total assets at
December 31, 1999 by $32,106 or 17.8 percent. The majority of this increase was
the result of growth in net loans as well as a significant investment in federal
funds sold. Net loans outstanding at December 31, 2000 compared to December 31,
1999 showed an increase of $22,455, or 19.4 percent, an increase which was a
result of increased loan demand in the Company's lending territory, as well as
the first full year of operation of the Company's indirect dealer loan program.
Federal funds sold balance of $12,310 at December 31, 2000 reflects the
investment of excess funds resulting from current year borrowings from the
Federal Home Loan Bank of Atlanta (FHLB).

Total securities at December 31, 2000 decreased by $2,379, or 4.7 percent
compared to December 31, 1999. This decrease was due to no purchases being made
of either available-for-sale or held-to-maturity securities, and current year
maturities, calls and paydowns totaling $2,577. Refer to note 3 of the notes to
consolidated financial statements for additional information concerning the
Company's investment securities.

Other assets increased by $263, or 32.3 percent, from December 31, 1999 to
December 31, 2000. The majority of this increase resulted from the Company's
current year investment in the Virginia Bankers Insurance Center. The Company
invested in this enterprise to enable it to provide certain insurance related
products to its customers. As of December 31, 2000, the Company's investment is
$238.

Total deposits increased by $24,119 or 15.4 percent, due mostly to increases in
total time deposits as well as the Bank's opening of the Brandon Oaks branch in
2000. Total time deposits were up from $93,922 to $111,704, an 18.9 percent
increase. Deposit balances increased due to more attractive depository rates
being made available to customers in 2000 than in 1999.

The Company entered into three long-term debt agreements with the Federal Home
Loan Bank of Atlanta (FHLB) during the year which totaled $10,000 at December
31, 2000. Included in this year's long-term debt activity was the conversion of
a prior year advance from FHLB which totaled $4,100 at December 31, 1999. Refer
to note 9 of the notes to the consolidated financial statements for additional
information concerning the Company's long-term debt.

                           ALLOWANCE FOR LOAN LOSSES

At December 31, 2000, the recorded investment in loans which have been
identified as impaired loans, in accordance with Statement 114, totaled $707
compared to $1,032 at December 31, 1999. Of these amounts,

                                                                     (Continued)

                                       4
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC AND SUBSIDIARY
  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
              Three Years Ended December 31, 2000, 1999 and 1998
          (In Thousands, Except Shares and Per Share Data and Ratios)


$281 and $711 related to loans with no valuation allowance, and $426 and $321,
respectively, related to loans with a corresponding valuation allowance of $89
and $67, respectively.

For the year ended December 31, 2000, the average recorded investment in
impaired loans was approximately $870 compared to $1,092 for the year ended
December 31, 1999, and the total interest income recognized on impaired loans
was $68 in 2000 versus $85 in 1999, of which $53 and $65 was recognized on a
cash basis in 2000 and 1999, respectively.

The provision for loan losses was $320 for the year ended December 31, 2000
compared to $315 for the year ended December 31, 1999. This marginal increase in
the annual provision resulted from improved loan portfolio quality as reflected
by relatively stable charge-off activity in the current year. Actual net charge-
offs were $195 for both the years ended December 31, 2000 and 1999. Management
understands that its efforts to improve earnings through increased loan volume
requires an adequate allowance for loan losses. Therefore, an ongoing evaluation
of the allowance for loan losses, as it relates to the growth and quality of the
portfolio, is being made to ensure that the allowance for loan losses is at a
sufficient level to absorb estimated losses in the Bank's loan portfolio. As of
December 31, 2000 and 1999, the ratio of the allowance for loan losses to loans,
net of unearned income, was 1.10 percent and 1.20 percent, respectively.
Management believes the allowance for loan losses of $1,529 at December 31, 2000
is adequate. While management uses available information to recognize loan
losses, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. The agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available at the time of
their examination.

Foreclosed properties decreased to $160 at December 31, 2000 from $216 at
December 31, 1999. This decrease resulted from a lesser volume of properties
being brought into foreclosure during the current year. Foreclosed properties
consist primarily of single-family property, some of which were under contract
to be sold as of December 31, 2000.

See note 5 to the Company's consolidated financial statements for summaries of
the changes in the Company's allowance for loan losses, nonperforming assets and
impaired loans. Also, see comments in note 15 to the Company's consolidated
financial statements.

                               CAPITAL RESOURCES

Stockholders' equity increased by $1,922, or 10.8 percent, to $19,759 as of
December 31, 2000 compared to stockholders' equity of $17,837 at December 31,
1999. The increase was primarily due to annual earnings, the majority of which
were retained. Stockholders' equity at December 31, 2000 has been reduced by
$86, compared to $210 at December 31, 1999, representing the net unrealized
losses on available-for-sale securities, net of income taxes, at year end. The
net unrealized losses on available-for-sale securities, net of income taxes,
which is recorded as accumulated other comprehensive income as a separate
component of stockholders' equity, will continue to be subject to change in
future periods due to fluctuations in market value, sales, purchases, maturities
and calls of securities classified as available-for-sale.

                                                                     (Continued)

                                       5
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC AND SUBSIDIARY
  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
              Three Years Ended December 31, 2000, 1999 and 1998
          (In Thousands, Except Shares and Per Share Data and Ratios)

Bankshares and the Bank were in compliance with minimum Tier 1 and total capital
ratios of 4 percent and 8 percent, respectively, at December 31, 2000. Also,
Bankshares' leverage ratio at December 31, 2000 was in excess of the 3 percent
minimum requirement. See note 12 of the notes to the consolidated financial
statements for additional information concerning Bankshares and the Bank's
capital requirements.

There are no material commitments for capital expenditures as of December 31,
2000. In addition, there are no expected material changes in the mix or relative
cost of capital resources.

                              NET INTEREST INCOME

The principal source of earnings for the Company is net interest income. Net
interest income is the net amount of interest earned on the Company's interest-
bearing assets less the amount of interest paid on the Company's deposits and
other interest-bearing liabilities. Net interest income before the provision for
loan losses was $7,890 for the year ended December 31, 2000 compared with $7,001
for the year ended December 31, 1999, an increase of $889 or 12.7 percent. Most
of this increase was due to the increased loan portfolio which grew more rapidly
during the period than interest-bearing deposits. Total interest income
increased from $13,505 in 1999 to $16,303 in 2000, an increase of $2,798 or 20.7
percent due primarily to the aforementioned increase in the loan portfolio.
Interest and fees on loans increased by $2,556, or 26.0 from 1999 to 2000.
Interest expense increased from $6,504 in 1999 to $8,413 in 2000, an increase of
$1,909 or 29.4 percent. As noted previously, this increase resulted from the
opening of the Brandon Oaks branch in the current year as well as the marketing
of more attractive depository products.

                              NONINTEREST INCOME

Noninterest income consists of earnings generated primarily from service charges
on deposit accounts and other service charges, commissions and fees. The
Company's total noninterest income increased from $1,137 in 1999 to $1,205 in
2000, an increase of 6.0 percent, due primarily to increases in service charges
on deposit accounts. Service charges on deposit accounts increased $87 or 18.0
percent over 1999 due to increases in returned check, stop payment and overdraft
charges which resulted from an overall increase in the volume of deposit
accounts.

                              NONINTEREST EXPENSE

The Company's total noninterest expense for the year ended December 31, 2000
increased $509, or 11.1 percent, compared to the year ended December 31, 1999,
due primarily to increases in salaries and employee benefits and other expenses.
The increase in salary and employee benefits expense in 2000 of $244, or 9.3
percent, was due primarily to routine merit adjustments, promotions and other
normal compensation related items. Furniture, fixtures and equipment expense
increased $46 or 10.3 percent due primarily to the opening of the Brandon Oaks
branch. Stationery, printing and supplies increased to $172 in 2000 from $117 in
1999 as a result of certain expenses incurred related to the formation of
Bankshares. In addition, other expenses in 2000 increased $128 or 12.0 percent
over 1999 due to increases in miscellaneous items, as well as the opening of the
Brandon Oaks branch in 2000 and the reorganization of the Company.


                                                                     (Continued)

                                       6
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC AND SUBSIDIARY
  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
              Three Years Ended December 31, 2000, 1999 and 1998
          (In Thousands, Except Shares and Per Share Data and Ratios)


                                 INCOME TAXES

Reported income tax expense increased $190 to $1,210 for the year ended December
31, 2000 compared to the year ended December 31, 1999. The Company's effective
tax rate was 32.9 percent in 2000 compared to 31.5 percent in 1999. The increase
in the effective tax rate resulted from a lower level of tax-exempt securities
being held in the current year relative to the prior year. See note 10 of the
notes to consolidated financial statements for additional information concerning
the Company's income taxes.

                                  NET INCOME

Net income for the year ended December 31, 2000 was $2,472 compared to $2,219
for the year ended December 31, 1999. This was an increase of $253, or 11.4
percent, due primarily to the increase in net interest income and offset by
increases in total noninterest expense and income tax expense. The Company
achieved a 1.25 percent return on average assets during 2000, compared to a 1.28
percent return for 1999. In addition, the Company achieved a return on average
equity of 12.97 percent in 2000 versus 12.77 percent in 1999.

                                   LIQUIDITY

Liquidity is the ability to generate adequate cash flow to meet financial
commitments and to fund customers' demands for funds, either in terms of loan
requests or deposit withdrawals. Liquidity may be provided by both assets and
liabilities. Asset liquidity is derived from sources such as sales, calls and
maturities of securities, principal and interest payments on loans, and cash and
due from banks. Liability liquidity is provided by the core deposit growth from
the Bank's stable customer base. Liquidity may also be provided by the issuance
of the Bankshares' common stock. Management believes the liquidity of the
Company remains adequate, as sufficient assets are maintained on a short-term
basis to meet the liquidity demands anticipated. Secondary sources of funds are
also available should the need arise. Management is not aware of any trends,
commitments or events that will result in or that are reasonably likely to
result in a material increase or decrease in liquidity.

Net cash provided by operating activities of $2,904 in 2000 decreased from
$4,566 in 1999 and was primarily attributable to lower levels of activity in the
mortgage loans held for sale category which fluctuates based upon loan demand
and the timing of loan sales in the secondary market. The most significant
component of net cash provided by operating activities in 2000 was net income of
$2,472. Net cash flows from financing activities in 2000 increased $14,028 from
1999 due primarily to borrowings made from the FHLB as well as deposit increases
resulting from the current year opening of the Brandon Oaks branch. Cash flows
from operating and financing activities were used primarily to fund the net
increase in loans of $22,362 and the net increase in federal funds sold of
$12,310 in 2000.

                             1999 COMPARED TO 1998
                             ---------------------

                                 BALANCE SHEET

Total assets of the Company at December 31, 1999 exceeded total assets at
December 31, 1998 by $17,693 or 10.9 percent. The majority of this increase was
the result of growth in net loans. Net loans outstanding at


                                                                     (Continued)

                                       7
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC AND SUBSIDIARY
  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
              Three Years Ended December 31, 2000, 1999 and 1998
          (In Thousands, Except Shares and Per Share Data and Ratios)


December 31, 1999 compared to December 31, 1998 showed an increase of $17,189,
or 17.5 percent, an increase which was a result of overall increased loan demand
in the Company's lending territory.

Total securities at December 31, 1999 increased by $9,135, or 21.9 percent
compared to December 31, 1998. This increase was due primarily to purchases of
both available-for-sale and held-to-maturity securities totaling $14,106 offset
by maturities, calls and paydowns of $4,742. Securities growth was funded in the
current year, despite significant loan growth, from a liquidation of the
Company's federal funds sold position and steady deposit growth. Included in
available-for-sale securities at December 31, 1999 are floating rate and step-up
rate U.S. Government agency securities with amortized costs of $1,761 and fair
values of $1,740. Included in held-to-maturity securities at December 31, 1999
is a floating rate U.S. Government agency security with an amortized cost of
$250 and a fair value of $251. Refer to note 3 of the notes to consolidated
financial statements for additional information concerning the Company's
investment securities.

Total deposits increased by $11,505, or 7.9 percent, due mostly to increases in
total time deposits. Total time deposits were up from $84,549 to $93,922, an
11.1 percent increase. Deposit balances increased due to more attractive
depository rates being made available to customers in 1999 than in 1998.

The Company received an advance from the Federal Home Loan Bank of Atlanta
during the year which totaled $4,100 at December 31, 1999. This advance was
necessary due to Year 2000 cash vault requirements and strong fourth quarter
loan growth.

                           ALLOWANCE FOR LOAN LOSSES

At December 31, 1999, the recorded investment in loans which have been
identified as impaired loans, in accordance with Statement 114, totaled $1,032
compared to $1,070 at December 31, 1998. Of these amounts, $711 at December 31,
1999 related to loans with no valuation allowance compared to $660 at December
31, 1998, and $321 and $410 at December 31, 1999 and 1998, respectively, related
to loans with a corresponding valuation allowance of $67 and $77, respectively.

For the year ended December 31, 1999, the average recorded investment in
impaired loans was approximately $1,092 compared to $998 for the year ended
December 31, 1998, and the total interest income recognized on impaired loans
was $85 in 1999 versus $96 in 1998, of which $65 and $76 was recognized on a
cash basis in 1999 and 1998, respectively.

The provision for loan losses was $315 for the year ended December 31, 1999
compared to $358 for the year ended December 31, 1998, a decrease of $43. This
decrease resulted from improved loan portfolio quality as reflected by decreased
charge-off activity in the current year. Actual net charge-offs were $195 for
the year ended December 31, 1999 versus $274 in net charge-offs for the year
ended December 31, 1998. Management understands that its efforts to improve
earnings through increased loan volume requires an adequate allowance for loan
losses. Therefore, an ongoing evaluation of the allowance for loan losses, as it
relates to the growth and quality of the portfolio, is being made to ensure that
the allowance for loan losses is at a sufficient level to absorb estimated
losses in the Company's portfolio. As of December 31, 1999 and 1998, the ratio
of the allowance for loan losses to loans, net of unearned income, was 1.20
percent and 1.29 percent, respectively. While management uses available
information to recognize loan losses, future

                                                                     (Continued)

                                       8
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC AND SUBSIDIARY
  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
              Three Years Ended December 31, 2000, 1999 and 1998
          (In Thousands, Except Shares and Per Share Data and Ratios)

additions to the allowance may be necessary based on changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
The agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available at the time of their examination.

Foreclosed properties decreased to $216 at December 31, 1999 from $559 at
December 31, 1998. This decrease resulted from a lesser volume of properties
being brought to foreclosure in the current year. Foreclosed properties consist
primarily of single-family property, some of which were under contract to be
sold as of December 31, 1999.

See note 5 to the Company's consolidated financial statements for summaries of
the changes in the Company's allowance for loan losses, nonperforming assets and
impaired loans. Also, see comments in note 15 to the Company's consolidated
financial statements.

                               CAPITAL RESOURCES

Stockholders' equity increased by $1,545, or 9.5 percent, to $17,837 as of
December 31, 1999 compared to stockholders' equity of $16,292 at December 31,
1998. The increase was primarily due to improved earnings, the majority of which
were retained. Stockholders' equity at December 31, 1999 has been reduced by
$210, compared to $46 at December 31, 1998, representing the net unrealized
losses on available-for-sale securities, net of income taxes, at year end. The
net unrealized losses on available-for-sale securities, net of income taxes,
which is recorded as accumulated other comprehensive income as a separate
component of stockholders' equity, will continue to be subject to change in
future periods due to fluctuations in market value, sales, purchases, maturities
and calls of securities classified as available-for-sale.

The Bank was in compliance with minimum Tier 1 and total capital ratios of 4
percent and 8 percent, respectively, at December 31, 1999. Also, the Bank's
leverage ratio at December 31, 1999 was in excess of the 3 percent minimum
requirement. See note 12 of the notes to the consolidated financial statements
for additional information concerning the Bank's capital requirements.

                              NET INTEREST INCOME

The principal source of earnings for the Company is net interest income. Net
interest income is the net amount of interest earned on the Company's interest-
bearing assets less the amount of interest paid on the Company's deposits and
other interest-bearing liabilities. Net interest income before the provision for
loan losses was $7,001 for the year ended December 31, 1999 compared with $6,205
for the year ended December 31, 1998, an increase of $796 or 12.8 percent. Most
of this increase was due to increased securities and loan portfolios which grew
more rapidly during the period than interest-bearing deposits. Total interest
income increased from $11,894 in 1998 to $13,505 in 1999, an increase of $1,611
or 13.5 percent due primarily to the aforementioned larger securities and loan
portfolios. Interest expense increased from $5,689 in 1998 to $6,504 in 1999, an
increase of $815 or 14.3 percent, due to steady growth in deposits.


                                                                     (Continued)

                                       9
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC AND SUBSIDIARY
  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
              Three Years Ended December 31, 2000, 1999 and 1998
          (In Thousands, Except Shares and Per Share Data and Ratios)

                              NONINTEREST INCOME

Noninterest income consists of earnings generated primarily from service charges
on deposit accounts and other service charges, commissions and fees. The
Company's total noninterest income increased from $1,125 in 1998 to $1,137 in
1999, an increase of 1.1 percent, due primarily to increases in service charges
on deposit accounts and offset by decreases in other service charges,
commissions and fees. Service charges on deposit accounts increased 19.3 percent
over 1998 due to increases in returned check, stop payment and overdraft charges
which resulted from an overall increase in the volume of deposit accounts. Other
service charges, commissions and fees decreased 12.6 percent compared to the
year ended December 31, 1998 due primarily to decreases in commissions on
mortgage loans sold to outside investors.

                              NONINTEREST EXPENSE

The Company's total noninterest expense for the year ended December 31, 1999
increased $180, or 4.1 percent, compared to the year ended December 31, 1998,
due primarily to increases in salaries and employee benefits and other expenses.
The 4.0 percent increase in salary and employee benefits expense in 1999 was due
primarily to routine merit adjustments, promotions and other normal compensation
related items. Furniture, fixtures and equipment expense increased 5.2 percent
due primarily to an increase in repairs and maintenance expenses, offset by a
decrease in depreciation expense. Write-downs and losses, net, on foreclosed
properties decreased to $24 in 1999 from $47 in 1998. Other expenses in 1999
increased 5.8 percent over 1998 due to increases in telephone expense, charge-
offs of overdrafts and cash items, and other miscellaneous items.

                                 INCOME TAXES

Reported income tax expense increased $243 to $1,020 for the year ended December
31, 1999 compared to the year ended December 31, 1998. The Company's effective
tax rate was 31.5 percent in 1999 compared to 30.3 percent in 1998. The increase
in the effective tax rate resulted from a lower level of tax-exempt securities
being held during 1999 relative to the prior year. See note 10 of the notes to
consolidated financial statements for additional information concerning the
Company's income taxes.

                                  NET INCOME

Net income for the year ended December 31, 1999 was $2,219 compared to $1,791
for the year ended December 31, 1998. This was an increase of $428, or 23.9
percent, due primarily to the increase in net interest income and offset by
increases in total noninterest expense and income tax expense. The Company
achieved a 1.28 percent return on average assets during 1999, compared to a 1.22
percent return for 1998. This increase resulted from net income growth outpacing
average asset growth. In addition, the Company achieved a return on average
equity of 12.77 percent in 1999 versus 11.32 percent in 1998. This increase
resulted from higher levels of net income and was only partially offset by an
increased dividend payment in the current year.


                                                                     (Continued)

                                       10
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC AND SUBSIDIARY
  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
              Three Years Ended December 31, 2000, 1999 and 1998
          (In Thousands, Except Shares and Per Share Data and Ratios)

                                   LIQUIDITY

Net cash provided by operating activities of $4,569 in 1999 increased $3,073
from 1998 and was primarily attributable to the increase in net income and the
change in the mortgage loans held for sale category which fluctuates based upon
loan demand and the timing of loan sales in the secondary market. Net cash flows
from financing activities in 1999 decreased $9,281 from 1998 due primarily to
significant decreases in cash flows from demand and savings deposits. Cash flows
from operating and financing activities were used primarily to fund the net
increase in loans of $17,189 and the net increase in securities of $9,135 in
1999.

                                    GENERAL
                                    -------

                    IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and related notes presented herein have
been prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to inflation.

Unlike many industrial companies, substantially all of the assets and virtually
all of the liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's performance than
the general level of inflation. Over short periods of time, interest rates may
not necessarily move in the same direction or in the same magnitude as
inflation.

                                  DERIVATIVES

The Company does not use derivatives or other off-balance sheet transactions
such as futures contracts, forward obligations, interest rate swaps, or options.

                           NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
adoption of SFAS No. 133, as amended, as of January 1, 2001, did not have any
effect on the financial position, results of operations or liquidity of the
Company.


                                                                     (Continued)

                                       11
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC AND SUBSIDIARY
  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
              Three Years Ended December 31, 2000, 1999 and 1998
          (In Thousands, Except Shares and Per Share Data and Ratios)

SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of FASB Statement No. 125,
supercedes and replaces the guidance in SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
140 revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires certain disclosures, but it
carries over most of the provisions of SFAS No. 125 without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities that occur after March 31, 2001, and for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Disclosures about securitization and collateral accepted need
not be reported for periods ending on or before December 15, 2000 for which
financial statements are presented for comparative purposes. Management believes
the adoption of SFAS No. 140 will not have a significant effect on the Company's
consolidated financial statements.

As of December 31, 2000, there are no other new accounting standards issued, but
not yet adopted by the Company, which are expected to be applicable to the
Company's financial position, operating results or financial statement
disclosures.

                                       12
<PAGE>

                         Independent Auditors' Report

The Board of Directors and Stockholders
Salem Community Bankshares, Inc.:


We have audited the accompanying consolidated balance sheets of Salem Community
Bankshares, Inc. and subsidiary as of December 31, 2000 and 1999, and the
related consolidated statements of income and comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Salem Community
Bankshares, Inc. and subsidiary as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.


Roanoke, Virginia
March 9, 2001

                                      13
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                           Consolidated Balance Sheets
                           December 31, 2000 and 1999
               (In Thousands, Except Shares and Per Share Data)




<TABLE>
<CAPTION>
                                     Assets                                                2000              1999
                                                                                      ----------------  --------------
<S>                                                                                   <C>               <C>
Cash and due from banks (notes 2 and 17)                                              $       8,283            8,959
Federal funds sold and securities purchased under resale agreements (note 17)                12,310               --
Securities (notes 3 and 17):
    Available-for-sale, at fair value                                                         9,019            9,376
    Held-to-maturity, at amortized cost (fair value $38,634 in 2000 and $38,555
       in 1999)                                                                              39,434           41,456
Mortgage loans held for sale (notes 14, 15 and 17)                                              139              346

Loans, less unearned income (notes 4, 5 and 15)                                             139,577          116,997
Less allowance for loan losses (note 5)                                                      (1,529)          (1,404)
                                                                                      ----------------  --------------
                   Loans, net (note 17)                                                     138,048          115,593
                                                                                      ----------------  --------------
Premises and equipment, net (note 6)                                                          2,107            2,147
Accrued interest receivable                                                                   1,805            1,369
Foreclosed properties (note 5)                                                                  160              216
Other assets (note 10)                                                                        1,077              814
                                                                                      ----------------  --------------
                   Total assets                                                       $     212,382          180,276
                                                                                      ================  ==============
                        Liabilities and Stockholders' Equity

Noninterest-bearing demand deposits                                                          21,680           20,128
Interest-bearing demand deposits                                                             41,429           36,735
Savings deposits                                                                              6,170            6,079
Time deposits (note 7)                                                                      111,704           93,922
                                                                                      ----------------  --------------
                   Total deposits (notes 7 and 17)                                          180,983          156,864

Federal funds purchased and securities sold under resale agreements (note 17)                    --              145
Federal Home Loan Bank advance (notes 9 and 17)                                                  --            4,100
Federal Home Loan Bank long-term debt (notes 9 and 17)                                       10,000               --
Accrued interest payable                                                                      1,486              941
Other liabilities                                                                               154              389
                                                                                      ----------------  --------------
                   Total liabilities                                                        192,623          162,439
                                                                                      ----------------  --------------
Stockholders' equity (notes 11 and 12):
    Common stock and surplus, no par value in 2000 and par value of $5.00 in
       1999.  Authorized 10,000,000 shares in 2000 and 2,000,000 in 1999; issued
       and outstanding 1,596,873 shares in 2000 and 1,526,067 shares in 1999                 17,079           16,077
    Retained earnings                                                                         2,766            1,970
    Accumulated other comprehensive loss                                                        (86)            (210)
                                                                                      ----------------  --------------
                   Total stockholders' equity                                                19,759           17,837

Commitments and contingent liabilities (notes 8, 11, 14 and 16)
                                                                                      ----------------  --------------
                   Total liabilities and stockholders' equity                         $     212,382          180,276
                                                                                      ================  ==============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       14
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
           Consolidated Statements of Income and Comprehensive Income
                  Years Ended December 31, 2000, 1999 and 1998
                      (In Thousands, Except Per Share Data)


<TABLE>
<CAPTION>
                                                                                    2000             1999              1998
                                                                             ----------------- ----------------- -----------------
<S>                                                                          <C>               <C>                <C>
Interest income:
    Interest and fees on loans                                               $      12,395            9,839             9,488
    Interest on federal funds sold and securities purchased under
       resale agreements                                                               410              538               722
    Interest on deposits with banks                                                    103                3                 2
    Interest on securities - taxable                                                 3,167            2,859             1,337
    Interest on securities - nontaxable                                                228              266               345
                                                                             ----------------- ----------------- -----------------
                   Total interest income                                            16,303           13,505            11,894
                                                                             ----------------- ----------------- -----------------
Interest expense:
    Interest on certificates of deposit of $100 or more                              1,105              885               719
    Interest on other deposits                                                       6,778            5,611             4,970
    Interest on federal funds purchased and securities sold under
       repurchase agreements                                                            11                8                --
    Interest on Federal Home Loan Bank borrowings                                      519               --                --
                                                                             ----------------- ----------------- -----------------
                   Total interest expense                                            8,413            6,504             5,689
                                                                             ----------------- ----------------- -----------------
                   Net interest income                                               7,890            7,001             6,205

Provision for loan losses (note 5)                                                     320              315               358
                                                                             ----------------- ----------------- -----------------
                   Net interest income after provision for loan losses               7,570            6,686             5,847

Noninterest income:
    Service charges on deposit accounts                                                570              483               405
    Other service charges, commissions and fees                                        529              521               596
    Other income                                                                       106              125               129
    Realized securities gains (losses), net                                             --                8                (5)
                                                                             ----------------- ----------------- -----------------
                   Total noninterest income                                          1,205            1,137             1,125
                                                                             ----------------- ----------------- -----------------
Noninterest expense:
    Salaries and employee benefits (note 8)                                          2,855            2,611             2,510
    Occupancy expense of premises                                                      351              324               308
    Furniture, fixtures and equipment                                                  491              445               423
    Stationery, printing and supplies                                                  172              117               111
    Write-downs and losses, net, on foreclosed properties                               33               24                47
    Other expenses                                                                   1,191            1,063             1,005
                                                                             ----------------- ----------------- -----------------
                   Total noninterest expense                                         5,093            4,584             4,404
                                                                             ----------------- ----------------- -----------------
                   Income before income tax expense                                  3,682            3,239             2,568

Income tax expense (note 10)                                                         1,210            1,020               777
                                                                             ----------------- ----------------- -----------------
                   Net income                                                        2,472            2,219             1,791

Other comprehensive income (loss), net of income tax expense
 (benefit):

       Net unrealized gains (losses) on available-for-sale
       securities (notes 1 and 3)                                                      124             (164)               8
                                                                             ----------------- ----------------- -----------------
                   Comprehensive income                                      $       2,596            2,055             1,799
                                                                             ================= ================= =================
Net income per share (note 1):
    Net income per share                                                     $        1.55             1.40              1.14
                                                                             ================= ================= =================
    Net income per share - assuming dilution                                 $        1.54             1.38              1.11
                                                                             ================= ================= =================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       15
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
                  Years Ended December 31, 2000, 1999 and 1998
                (In Thousands, Except Shares and Per Share Data)

<TABLE>
<CAPTION>
                                                           Common                        Accumulated
                                                           Stock                            Other
                                                            and          Retained       Comprehensive
                                                          Surplus        Earnings           Income           Total
                                                     --------------- ---------------- ------------------ -----------
<S>                                                  <C>             <C>              <C>                <C>
Balances at December 31, 1997                        $     13,843           1,116               (54)        14,905

Net income                                                     --           1,791                --          1,791
Cash dividend at $.34 per share                                --            (519)               --           (519)
4% stock dividend (55,789 shares)                             948            (948)               --             --
Stock dividend fractional shares payment                       --              (5)               --             (5)
Stock options exercised (9,573 shares)                         87              --                --             87
Income tax benefit from stock options
    exercised                                                  25              --                --             25
Transfer per regulatory requirement                           157            (157)               --             --
Change in net unrealized losses on
    available-for-sale securities, net
    of income tax expense of $5                                --              --                 8              8
                                                     --------------- ---------------- ------------------ -----------
Balances at December 31, 1998                              15,060           1,278               (46)        16,292

Net income                                                     --           2,219                --          2,219
Cash dividend at $.38 per share                                --            (617)               --           (617)
4% stock dividend (58,386 shares)                             905            (905)               --             --
Stock dividend fractional shares payment                       --              (5)               --             (5)
Stock options exercised (9,477 shares)                         85              --                --             85
Income tax benefit from stock options
    exercised                                                  27              --                --             27
Change in net unrealized losses on
    available-for-sale securities, net
    of income tax benefit of $84                               --              --              (164)          (164)
                                                     --------------- ---------------- ------------------ -----------
Balances at December 31, 1999                              16,077           1,970              (210)        17,837

Net income                                                     --           2,472                --          2,472
Cash dividend at $.48 per share                                --            (768)               --           (768)
4% stock dividend (60,887 shares)                             897            (897)               --             --
Stock dividend fractional shares payment                       --             (11)               --            (11)
Stock options exercised (9,919 shares)                         88              --                --             88
Income tax benefit from stock options
    exercised                                                  17              --                --             17
Change in net unrealized losses on
    available-for-sale securities, net
    of income tax expense of $64                               --              --               124            124
                                                     --------------- ---------------- ------------------ -----------
Balances at December 31, 2000                        $     17,079           2,766               (86)        19,759
                                                     =============== ================ ================== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       16
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                  Years Ended December 31, 2000, 1999 and 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                                 2000           1999           1998
                                                                           ---------------  ------------- -------------
<S>                                                                        <C>              <C>           <C>
Cash flows from operating activities (note 13):

    Net income                                                             $     2,472          2,219         1,791
    Adjustments to reconcile net income to net cash provided by
      operating activities:
        Provision for loan losses                                                  320            315           358
        Deferred income taxes                                                       93            (47)          (55)
        Depreciation and amortization of premises and equipment                    304            269           314
        Gain on disposal of equipment                                               --             (1)           --
        Amortization of premiums and accretion of discounts, net                   (10)           (11)           (5)
        Write-downs and losses on foreclosed properties, net                        33             24            47
        Loss on calls of available-for-sale securities, net                         --             --             5
        Gain on calls of held-to-maturity securities                                --             (8)           --
        Income tax benefit from stock options exercised                             17             27            25
        (Increase) decrease in:
           Mortgage loans held for sale                                            207          1,556          (580)
           Accrued interest receivable                                            (436)          (231)         (237)
           Other assets                                                           (420)           (16)         (134)
        Increase (decrease) in:
           Accrued interest payable                                                545            166            71
           Other liabilities                                                      (221)           304          (104)
                                                                           ---------------  ------------- -------------
                 Net cash provided by operating activities                       2,904          4,566         1,496
                                                                           ---------------  ------------- -------------
Cash flows from investing activities (note 13):
    Net (increase) decrease in federal funds sold and securities purchased
      under resale agreements                                                  (12,310)        10,180        (3,735)
    Proceeds from maturities and calls of available-for-sale securities            545            402         3,065
    Proceeds from maturities and calls of held-to-maturity securities            2,032          4,340        13,960
    Purchases of available-for-sale securities                                      --         (7,106)          (74)
    Purchases of held-to-maturity securities                                        --         (7,000)      (36,490)
    Purchases of loan participations                                              (581)        (1,742)         (152)
    Collections of loan participations                                             136            203           369
    Net increase in loans made to customers                                    (22,632)       (16,267)       (2,369)
    Recoveries on loans previously charged off                                     125             81           116
    Proceeds from sales of foreclosed properties                                   200            540           304
    Capital expenditures on foreclosed properties                                   --             --           (10)
    Purchases of premises and equipment                                           (264)          (304)         (144)
                                                                           ---------------  ------------- -------------
                 Net cash used in investing activities                         (32,749)       (16,673)      (25,160)
                                                                           ---------------  ------------- -------------
Cash flows from financing activities (note 13):
    Net increase in time deposits                                               17,782          9,373         9,637
    Net increase in demand and savings deposits                                  6,337          2,132        15,289
    Net increase in federal funds purchased and securities sold under
      resale agreements                                                           (145)           145            --
    Net increase (decrease) in Federal Home Loan Bank advances                  (4,100)         4,100            --
    Proceeds from Federal Home Loan Bank long-term debt                         10,000             --            --
    Principal payments on capital lease obligations                                (14)           (72)          (70)
    Proceeds from exercise of stock options                                         88             85            87
    Cash dividends paid                                                           (779)          (622)         (524)
                                                                           ---------------  ------------- -------------
                 Net cash provided by financing activities                      29,169         15,141        24,419
                                                                           ---------------  ------------- -------------
                 Net increase (decrease) in cash and due from banks               (676)         3,034           755
Cash and due from banks at beginning of year                                     8,959          5,925         5,170
                                                                           ---------------  ------------- -------------
Cash and due from banks at end of year                                     $     8,283          8,959         5,925
                                                                           ===============  ============= =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       17
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


(1)    Summary of Significant Accounting Policies

       The accounting and reporting policies of Salem Community Bankshares, Inc.
       ("Bankshares") and its wholly-owned subsidiary, Salem Bank and Trust,
       National Association, (the "Bank") (collectively, the "Company"), conform
       to accounting principles generally accepted in the United States of
       America and general practices within the banking industry.

       Bankshares, a Virginia corporation, was incorporated under the laws of
       the Commonwealth of Virginia on May 28, 1999, primarily to serve as a
       holding company for the Bank. Effective September 11, 2000, the Bank
       became a wholly-owned subsidiary of Bankshares. Pursuant to this
       reorganization, Bankshares issued 1,535,986 shares of its common stock,
       no par value, in exchange for 1,535,986 shares of the Bank's common
       stock, $5.00 par value. The reorganization has been accounted for as a
       pooling-of-interests and, accordingly, the consolidated financial
       statements for the periods prior to September 11, 2000 include the
       accounts and results of operations of the Bank. All shares and per share
       data have been adjusted to reflect the exchange of Bankshares' shares for
       Bank shares.

       The following is a summary of the more significant accounting policies:

       (a)    Consolidation

              The consolidated financial statements include the accounts of
              Salem Community Bankshares, Inc. and its wholly-owned subsidiary.
              All significant intercompany balances and transactions have been
              eliminated in consolidation.

       (b)    Cash Equivalents

              For purposes of reporting cash flows, cash and cash equivalents
              include the amounts classified on the consolidated balance sheets
              as cash and due from banks.

       (c)    Securities

              Securities available-for-sale are reported at fair value, with
              unrealized gains and losses excluded from net income and reported,
              net of income taxes, in a separate component of stockholders'
              equity. Securities held-to-maturity are stated at cost, adjusted
              for amortization of premiums and accretion of discounts on a basis
              which approximates the level yield method. The Company does not
              engage in securities trading. Gains and losses on securities are
              accounted for on the completed transaction basis by the specific
              identification method.

              A decline in the fair value of any available-for-sale or held-to-
              maturity security below cost that is deemed other than temporary
              is charged to income resulting in the establishment of a new cost
              basis for the security.

              As members of the Federal Reserve and the Federal Home Loan Bank
              (FHLB) of Atlanta, the Bank is required to maintain certain
              minimum investments in the common stock of those entities.


                                                                     (Continued)

                                       18
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


              Required levels of investments are based upon the Bank's capital
              and a percentage of qualifying assets. These investments are
              carried at cost.

       (d)    Loans

              Loans are stated at the amount of funds disbursed plus the
              applicable amount, if any, of the unearned income and other
              charges less payments received. Interest on installment loans,
              including impaired installment loans that have not been placed in
              nonaccrual status, is credited to income based upon the level
              yield method or the sum-of-the-months'-digits method, which does
              not differ materially from the level yield method. Interest on all
              other loans, including impaired loans that have not been placed in
              nonaccrual status, is accrued based on the balances outstanding
              times the applicable interest rates. Loans are generally placed in
              nonaccrual status when the collection of principal or interest is
              90 days or more past due, unless the obligation is both well-
              secured and in the process of collection. The interest on
              nonaccrual loans is accounted for on the cash basis until
              qualifying for return to accrual. Loans are returned to accrual
              status when all the principal and interest amounts contractually
              due are brought current and future payments are reasonably
              assured.

              Impaired loans are presented in the financial statements at the
              present value of expected future cash flows or at the fair value
              of the loan's collateral if the loan is deemed "collateral
              dependent." A valuation allowance is required to the extent that
              the measure of the impaired loans is less than the recorded
              investment. Large groups of small-balance homogeneous loans such
              as residential real estate mortgage, consumer installment, home
              equity and bank card loans are collectively evaluated for
              impairment.

              Loan origination and commitment fees and certain related costs are
              deferred, and the net amount amortized as an adjustment of yield
              over the contractual life of the related loan.

       (e)    Allowance for Loan Losses

              The allowance for loan losses is a valuation allowance consisting
              of the cumulative effect of the provision for loan losses, plus
              any amounts recovered on loans previously charged off, minus loans
              charged off. The provision for loan losses charged to operating
              expenses is the amount necessary in management's judgment to
              maintain the allowance for loan losses at a level it believes
              sufficient to cover losses in the collection of its loans.

       (f)    Mortgage Loans Held for Sale

              Mortgage loans held for sale are carried at the lower of cost or
              market value determined on an aggregate basis.

                                                                     (Continued)

                                       19
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


       (g)    Premises and Equipment

              Premises and equipment are stated at cost less accumulated
              depreciation and amortization. Equipment under capital leases is
              stated at the present value of minimum lease payments at the
              inception of the lease. Depreciation is computed by the straight-
              line method based on estimated useful lives of eighteen to thirty-
              nine years for buildings and five to seven years for furniture,
              fixtures and equipment. Leasehold improvements are amortized on a
              straight-line basis over the terms of the leases. Equipment held
              under capital leases is amortized straight-line over the estimated
              useful lives of the assets since the leases transfer ownership or
              contain a bargain purchase option. The cost of assets retired and
              sold and the related accumulated depreciation are eliminated from
              the accounts and the resulting gains or losses are included in
              determining net income. Expenditures for maintenance and repairs
              are charged to expense as incurred and improvements are
              capitalized.

       (h)    Foreclosed Properties

              Foreclosed properties, acquired through foreclosure or deed in
              lieu of foreclosure, are carried at the lower of the recorded
              investment in the property or its fair value less estimated
              selling costs. When the property is acquired, any excess of the
              loan balance over the fair value less estimated selling costs of
              the property is charged to the allowance for loan losses.
              Subsequent write-downs, if any, are charged to expense. Gains and
              losses on the sale of foreclosed properties are recorded in income
              in the year of the sale.

       (i)    Income Taxes

              Income taxes are accounted for under the asset and liability
              method. Deferred tax assets and liabilities are recognized for the
              future tax consequences attributable to differences between the
              financial statement carrying amounts of existing assets and
              liabilities and their respective tax bases and operating loss and
              tax credit carryforwards. Deferred tax assets and liabilities are
              measured using enacted tax rates expected to apply to taxable
              income in the years in which those temporary differences are
              expected to be recovered or settled. The effect on deferred tax
              assets and liabilities of a change in tax rates is recognized in
              income in the period that includes the enactment date.

       (j)    Net Income Per Share

              Net income per share excludes dilution and is computed by dividing
              income available to common stockholders by the weighted-average
              number of common shares outstanding for the period. Net income per
              share - assuming dilution reflects the potential dilution that
              could occur if securities or other contracts to issue common stock
              were exercised or converted into common stock or resulted in the
              issuance of common stock that then shared in the earnings of the
              Company.

              The following is a reconciliation of the numerators and
              denominators of the net income per share and net income per share-
              assuming dilution computations for the periods indicated:


                                                                     (Continued)

                                       20
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


<TABLE>
<CAPTION>
                                                               Net Income                 Shares                  Per Share
Year Ended December 31, 2000                                  (Numerator)             (Denominator)                 Amount
-----------------------------                             ---------------------   -----------------------   -----------------------
<S>                                                       <C>                     <C>                       <C>
Net income per share                                      $       2,472                 1,590,824            $       1.55
                                                                                                            =======================
Effect of dilutive stock options                                     --                    13,001
                                                          ---------------------   -----------------------
Net income per share - assuming dilution                   $      2,472                 1,603,825            $       1.54
                                                          =====================   =======================   =======================

<CAPTION>
                                                               Net Income                 Shares                  Per Share
Year Ended December 31, 1999                                  (Numerator)             (Denominator)                 Amount
----------------------------                              ---------------------   -----------------------   -----------------------
Net income per share                                       $      2,219                 1,581,102            $       1.40
                                                                                                            =======================
Effect of dilutive stock options                                     --                    22,470
                                                          ---------------------   -----------------------
Net income per share - assuming dilution                   $      2,219                 1,603,572            $       1.38
                                                          =====================   =======================   =======================

<CAPTION>
                                                               Net Income                 Shares                  Per Share
Year Ended December 31, 1998                                  (Numerator)             (Denominator)                 Amount
----------------------------                              ---------------------   -----------------------   -----------------------
Net income per share                                       $      1,791                 1,570,882            $       1.14
                                                                                                            =======================
Effect of dilutive stock options                                     --                    36,651
                                                          ---------------------   -----------------------
Net income per share - assuming dilution                   $      1,791                 1,607,533            $       1.11
                                                          =====================   =======================   =======================
</TABLE>


              Stock options that could potentially dilute net income per share
              in the future that were not included in the computation of net
              income per share - assuming dilution, because to do so would have
              been antidilutive for the periods presented, totaled 27,828,
              21,588 and 8,845 in 2000, 1999 and 1998, respectively.

       (k)    Stock Dividends

              All prior-period weighted average shares outstanding, net income
              per share, cash dividends per share and stock option data has been
              adjusted to reflect the effects of the Company's stock dividends.

       (l)    Stock Option Plan

              The Company has adopted SFAS No. 123, Accounting for Stock-Based
              Compensation, which permits entities to recognize as expense over
              the vesting period the fair value of all stock-based awards on the
              date of grant. Alternatively, SFAS No. 123 also allows entities to
              continue to apply the provisions of APB Opinion No. 25 and provide
              pro forma net income and pro forma earnings per share disclosures
              for employee stock option grants made in 1995 and future years as
              if the fair-value-based method defined in SFAS No. 123 had been
              applied. The Company has elected to apply the provisions of APB
              Opinion No. 25 and provide the pro forma disclosure provisions of
              SFAS No. 123.


                                                                     (Continued)

                                       21
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


       (m)    Fair Value of Financial Instruments

              Statement of Financial Accounting Standards No. 107, Disclosures
              about Fair Value of Financial Instruments, requires the Company to
              disclose estimated fair values of its financial instruments. The
              following methods and assumptions were used to estimate the fair
              value of each class of financial instrument for which it is
              practicable to estimate that value:

              .   Cash and Due from Banks, Federal Funds Sold and Securities
                  Purchased under Resale Agreements, Federal Funds Purchased and
                  Securities Sold Under Resale Agreements, and Federal Home Loan
                  Bank Advances

                  The carrying amounts are a reasonable estimate of fair value
                  because of the short maturity of these instruments.

              .   Securities

                  The fair value of securities, except certain state and
                  municipal securities, is determined by quoted market price.
                  The fair value of certain state and municipal securities is
                  not readily available through market sources other than dealer
                  quotations, so fair value estimates are based on quoted market
                  prices of similar instruments, adjusted for differences
                  between the quoted instruments and the instruments being
                  valued.

              .   Loans

                  Fair values are estimated for portfolios of loans with similar
                  financial characteristics. Loans are segregated by type such
                  as mortgage loans held for sale, commercial, real estate -
                  commercial, real estate - construction, real estate -mortgage,
                  credit card and other consumer loans. Each loan category is
                  further segmented into fixed and adjustable rate interest
                  terms.

                  The fair value of loans is estimated by discounting the future
                  cash flows using the current interest rates at which similar
                  loans would be made to borrowers for the same remaining
                  maturities. Fair value is further adjusted for credit risk
                  based on estimates for cash flows not expected to be
                  collected. Assumptions regarding credit risk are judgmentally
                  determined using available external appraisals and specific
                  borrower information.

              .   Deposits and Federal Home Loan Bank Long-term Debt

                  The fair value of demand and savings deposits is the amount
                  payable on demand. The fair value of fixed maturity time
                  deposits, certificates of deposit and FHLB long-term debt is
                  estimated using the rates currently offered for deposits or
                  borrowings with similar remaining maturities.


                                                                     (Continued)

                                       22
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


              .   Commitments to Extend Credit and Standby Letters of Credit

                  The only amounts recorded for commitments to extend credit,
                  standby letters of credit and financial guarantees written are
                  the deferred fees arising from these unrecognized financial
                  instruments. These deferred fees are not deemed significant at
                  December 31, 2000 and 1999, and as such, the related fair
                  values have not been estimated.

       (n)    Comprehensive Income

              The Company has included consolidated statements of income and
              comprehensive income in the accompanying consolidated financial
              statements. Comprehensive income consists of net income and net
              unrealized gains (losses) on securities available-for-sale. Also,
              accumulated other comprehensive income (loss) is included as a
              separate disclosure within the Consolidated Statements of Changes
              in Stockholders' Equity in the accompanying consolidated financial
              statements.

       (o)    Use of Estimates

              In preparing the consolidated financial statements, management is
              required to make estimates and assumptions that affect the
              reported amounts of assets and liabilities and the disclosure of
              contingent assets and liabilities as of the dates of the
              consolidated balance sheets and the reported amounts of revenues
              and expenses for the years presented. Actual results could differ
              significantly from those estimates.

              Material estimates that are particularly susceptible to
              significant change in the near term relate to the determination of
              the allowance for loan losses and the valuation of foreclosed
              properties acquired in connection with foreclosures or in
              satisfaction of loans. In connection with the determination of the
              allowance for loan losses and the valuation of foreclosed
              properties, management obtains independent appraisals for
              significant properties.

              Management believes the allowance for loan losses and the
              valuation of foreclosed properties are adequate. While management
              uses available information to recognize losses on loans and
              foreclosed properties, future additions to the allowance for loan
              losses and write-downs to foreclosed properties may be necessary
              based on changes in economic conditions. In addition, various
              regulatory agencies, as an integral part of their examination
              process, periodically review the Bank's allowance for loan losses
              and its valuation of foreclosed properties. Such agencies may
              require the Bank to recognize additions to the allowance for loan
              losses and additional write-downs to foreclosed properties based
              on their judgments about information available to them at the time
              of their examinations.

       (p)    Reclassifications

              Certain reclassifications have been made to prior years'
              consolidated financial statements to place them on a basis
              comparable with the 2000 consolidated financial statements.


                                                                     (Continued)

                                       23
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 2000, 1999 and 1998
                (In Thousands, Except Shares and Per Share Data)


(2)    Cash Restrictions

       To comply with Federal Reserve regulations, the Bank is required to
       maintain certain average reserve balances. The daily average reserve
       requirements were $1,035 and $958 for the weeks including December 31,
       2000 and 1999, respectively.

(3)    Securities

       The amortized costs, gross unrealized holding gains, gross unrealized
       holding losses and fair values for available-for-sale and held-to-
       maturity securities by major security type are as follows:


<TABLE>
<CAPTION>
                                                                                     December 31, 2000
                                                      ------------------------------------------------------------------------------
                                                                               Gross               Gross
                                                                             Unrealized         Unrealized
                                                        Amortized             Holding             Holding               Fair
Available-for-sale                                        Costs                Gains              Losses               Values
------------------                                    ------------------  -----------------  ------------------  -------------------
<S>                                                    <C>                   <C>                <C>                <C>
U.S. Government agencies and corporations              $       6,992             --                 (79)               6,913
Mortgage-backed securities                                     1,124             --                 (51)               1,073
Federal Home Loan Bank stock                                     551             --                  --                  551
Federal Reserve Bank stock                                       482             --                  --                  482
                                                      ------------------  -----------------  ------------------  -------------------
                   Totals                              $       9,149             --                (130)               9,019
                                                      ==================  =================  ==================  ===================

<CAPTION>
                                                                                    December 31, 2000
                                                      ------------------------------------------------------------------------------
                                                                               Gross               Gross
                                                                             Unrealized         Unrealized
                                                        Amortized             Holding             Holding               Fair
Held-to-maturity                                          Costs                Gains              Losses               Values
----------------                                      ------------------  -----------------  ------------------  -------------------
<S>                                                  <C>                   <C>                 <C>                 <C>
U.S. Government agencies and corporations             $       35,397             --                (849)              34,548
Mortgage-backed securities                                       251              1                 --                   252
Obligations of state and political subdivisions                3,786             49                  (1)               3,834
                                                      ------------------  -----------------  ------------------  -------------------
                   Totals                             $       39,434             50                (850)              38,634
                                                      ==================  =================  ==================  ===================
</TABLE>

                                                                     (Continued)

                                       24
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 2000, 1999 and 1998
                (In Thousands, Except Shares and Per Share Data)


<TABLE>
<CAPTION>
                                                                                  December 31, 1999
                                                      ------------------------------------------------------------------------------
                                                                               Gross               Gross
                                                                             Unrealized         Unrealized
                                                       Amortized              Holding             Holding               Fair
Available-for-sale                                       Costs                 Gains              Losses               Values
------------------                                    -----------------   -----------------  ------------------  -------------------
<S>                                                   <C>                  <C>                 <C>                 <C>
U.S. Government agencies and corporations              $      7,492                 --               (299)              7,193
Mortgage-backed securities                                    1,260                 --                (19)              1,241
Federal Home Loan Bank stock                                    409                 --                  --                409
Federal Reserve Bank stock                                      418                 --                  --                418
Other securities                                                115                 --                  --                115
                                                      -----------------   -----------------  ------------------  -------------------
                   Totals                              $      9,694                 --               (318)              9,376
                                                      =================   =================  ==================  ===================

<CAPTION>
                                                                                  December 31, 1999
                                                      ------------------------------------------------------------------------------
                                                                               Gross               Gross
                                                                             Unrealized         Unrealized
                                                        Amortized             Holding             Holding               Fair
Held-to-maturity                                          Costs                Gains              Losses               Values
----------------                                      ------------------  -----------------  ------------------  -------------------
<S>                                                    <C>                 <C>                 <C>                 <C>
U.S. Government agencies and corporations              $     36,962                  8             (2,980)             33,990
Mortgage-backed securities                                      287                  3                 --                 290
Obligations of state and political subdivisions               4,207                 74                 (6)              4,275
                                                      ------------------  -----------------  ------------------  -------------------
                   Totals                              $     41,456                 85             (2,986)             38,555
                                                      ==================  =================  ==================  ===================

</TABLE>


       The amortized costs and fair values of securities at December 31, 2000,
       by contractual maturity, are shown below. Expected maturities may differ
       from contractual maturities because borrowers may have the right to call
       or prepay obligations with or without call or prepayment penalties.


<TABLE>
<CAPTION>
                                                                                  December 31, 2000
                                                      ------------------------------------------------------------------------------
                                                               Available-for-Sale                       Held-to-Maturity
                                                      ------------------------------------------------------------------------------
                                                       Amortized                Fair             Amortized              Fair
                                                         Costs                 Values              Costs               Values
                                                      -----------------   -----------------  ------------------  -------------------
<S>                                                    <C>                 <C>                <C>                 <C>
Due in one year or less                                $         --                 --                 800                802
Due after one year through five years                         1,124              1,073               4,616              4,622
Due after five years through ten years                           --                 --              11,020             10,888
Due after ten years                                           6,992              6,913              22,998             22,322
No maturity                                                   1,033              1,033                  --                 --
                                                      -----------------   -----------------  ------------------  -------------------
                   Totals                              $      9,149              9,019              39,434             38,634
                                                      =================   =================  ==================  ===================
</TABLE>


       There were no sales of securities during the years ended December 31,
       2000, 1999 and 1998.

       Securities with amortized costs of $31,821 and $24,214 (fair values of
       $31,227 and $23,265, respectively) at December 31, 2000 and 1999,
       respectively, were pledged to secure public deposits and for other
       purposes required or permitted by law.


                                                                      (Continue)

                                       25
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


(4)    Loans

       A summary of loans outstanding is as follows:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                 ---------------------------------------------
                                                                         2000                      1999
                                                                 --------------------      -------------------
<S>                                                               <C>                       <C>
Commercial                                                        $          13,527                     9,058
Consumer, principally installment                                            34,520                    22,183
Real estate - mortgage                                                       76,481                    71,914
Real estate - construction                                                   16,285                    14,881
                                                                 ------------------       -------------------
                Total loans                                                 140,813                   118,036
Less unearned income                                                         (1,236)                   (1,039)
                                                                 ------------------       -------------------
                Total loans, less unearned income                 $         139,577                   116,997
                                                                 ==================       ===================
</TABLE>


       In the normal course of business, the Bank has made loans to directors
       and officers. At December 31, 2000, direct loans to directors and
       officers totaled $425 compared to $348 at December 31, 1999. In addition,
       indirect loans (i.e., loans to companies in which directors and officers
       have an interest, immediate family members, or any other associates of
       such directors and officers) totaled $668 and $688 at December 31, 2000
       and 1999, respectively.

       A summary of the activity during the year ended December 31, 2000
       relating to direct and indirect loans to officers and directors is as
       follows:

       Aggregate balance, beginning of year               $          1,036
       Additions                                                       694
       Collections                                                    (637)
                                                          ----------------
       Aggregate balance, end of year                     $          1,093
                                                          ================




(5)    Nonperforming Assets, Impaired Loans and Allowance for Loan Losses

       Nonperforming assets consist of the following:

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                     ----------------------------------------
                                                                            2000                 1999
                                                                     -----------------     ------------------
<S>                                                                  <C>
Nonaccrual basis                                                     $         583                    810
Foreclosed properties                                                          160                    216
                                                                     -----------------     ------------------
               Total nonperforming assets                            $         743                  1,026
                                                                     =================     ==================
</TABLE>

                                                                     (Continued)

                                       26
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)

       There were no commitments to lend additional funds to customers whose
       loans were classified as nonperforming at December 31, 2000 and 1999.

       The following table shows the pro forma interest that would have been
       earned on nonaccrual loans if they had been current in accordance with
       their original terms and the recorded interest that was earned and
       included in income on these loans:

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                       ----------------------------------------------------------
                                                              2000               1999                 1998
                                                       ------------------  ------------------  ------------------
<S>                                                     <C>                 <C>                 <C>
Pro forma interest on nonaccrual loans                  $       62                  80                  74
                                                       ==================  ==================  ==================
Recorded interest on nonaccrual loans                   $       53                  65                  76
                                                       ==================  ==================  ==================
</TABLE>

       Included in nonaccrual loans as of December 31, 2000 is a restructured
       loan totaling $301. Pro forma interest and recorded interest on this
       restructured loan was $21 and $15 for the year ended December 31, 2000.
       This loan was restructured during 2000.

       At December 31, 2000 and 1999, the recorded investment in loans which
       have been identified as impaired loans totaled $707 and $1,032,
       respectively. Of these amounts, $281 and $711 related to loans with no
       valuation allowance, and $426 and $321 related to loans with a
       corresponding valuation allowance of $89 and $67, respectively.

       For the years ended December 31, 2000, 1999 and 1998, the average
       recorded investment in impaired loans was approximately $870, $1,092 and
       $998, and the total interest income recognized on impaired loans was $68,
       $85 and $96, of which $53, $65 and, $76, respectively, was recognized on
       a cash basis.

       A summary of the changes in the allowance for loan losses follows:


<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                      ------------------------------------------------------------
                                                             2000                 1999                1998
                                                      ------------------  -------------------  -------------------
<S>                                                    <C>                  <C>                   <C>
Balances, beginning of year                            $       1,404                1,284                1,200
Provision for loan losses                                        320                  315                  358
Loans charged off                                               (320)                (276)                (390)
Loan recoveries                                                  125                   81                  116
                                                      ------------------  -------------------  -------------------
Balances, end of year                                  $       1,529                1,404                1,284
                                                      ==================  ===================  ===================

</TABLE>
                                                                     (Continued)

                                       27
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)

(6)    Premises and Equipment

       A summary of premises and equipment stated at cost, less accumulated
       depreciation and amortization, follows:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                              -------------------------------------
                                                                    2000                1999
                                                              -----------------   -----------------
<S>                                                           <C>                  <C>
Premises                                                      $       1,675               1,657
Furniture, fixtures and equipment                                     2,786               2,572
Leasehold improvements                                                  368                 349
                                                              -----------------   -----------------
                                                                      4,829               4,578
Less accumulated depreciation and amortization                       (2,722)             (2,431)
                                                              -----------------   -----------------
Premises and equipment, net                                   $       2,107               2,147
                                                              =================   =================
</TABLE>



(7)    Time and Other Deposits

       Included in time deposits are certificates of deposit and other time
       deposits of $100 or more in the aggregate amounts of $22,677 and $17,873
       at December 31, 2000 and 1999, respectively.

       At December 31, 2000, the scheduled maturities of time deposits are as
       follows:

                         Years Ending December 31,
                         2001                              $  58,722
                         2002                                 16,425
                         2003                                 22,635
                         2004                                  8,494
                         2005                                  4,060
                         Thereafter                            1,368
                                                           ----------
                                                           $ 111,704
                                                           ==========



       Included in total deposits are funds deposited by local municipalities
       totaling $19,301 and $15,992 at December 31, 2000 and 1999, respectively.

(8)    Employee Retirement Plan

       The Bank maintains a 401(k) defined contribution plan which covers
       substantially all of its employees. To become eligible for the plan, an
       employee must complete six months of service and be at least 21 years of
       age. The plan allows participants to contribute through salary reduction
       up to 20 percent of their annual compensation on a pretax basis.
       Contributions by the Bank are paid into a trust



                                                                     (Continued)

                                       28
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


       semimonthly at the rate of 5 percent of eligible compensation. The annual
       expense under the plan was $105, $104 and $96 for the years ended
       December 31, 2000, 1999 and 1998, respectively.

(9)    Federal Home Loan Bank (FHLB) Borrowings

       The Bank is eligible to borrow from the FHLB with borrowings
       collateralized by qualifying assets, primarily residential mortgage loans
       and the Bank's capital stock investment in the FHLB. At December 31,
       2000, the Bank's available borrowing limit approximates $25,000. At
       December 31, 2000, the Bank has a total of $10,000 in FHLB long-term debt
       outstanding with fixed interest rates ranging from 6.18 percent to 7.26
       percent. Interest is payable quarterly, with the principal amount due in
       full in 2010.

       As of December 31, 1999, the Bank had $4,100 in FHLB short-term advances
       outstanding which were subsequently paid in 2000.

(10)   Income Taxes

       Total income taxes were allocated as follows:

<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                         ----------------------------------------------------------
                                                                              2000                  1999               1998
                                                                         -------------------  -----------------  ------------------
<S>                                                                       <C>                   <C>               <C>
Income                                                                    $     1,210             1,020                 777
Stockholders' equity for:
    Net unrealized gains (losses) on available-for-sale
       securities recognized for financial reporting purposes                      64               (84)                  5
    Compensation cost recognized for income
       tax purposes related to stock options exercised                            (17)              (27)                (25)
                                                                         -------------------  -----------------  ------------------
                     Total income taxes                                   $     1,257               909                 757
                                                                         ===================  =================  ==================
</TABLE>


       Income tax expense attributable to income before income tax expense is as
follows:

<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                ------------------------------------------------------------
                                                                       2000                    1999               1998
                                                                --------------------   -----------------  ------------------
<S>                                                              <C>                      <C>              <C>
Current                                                           $        1,117               1,067                 832
Deferred                                                                      93                 (47)                (55)
                                                                --------------------   -----------------  ------------------
                     Total income tax expense                     $        1,210               1,020                 777
                                                                ====================   =================  ==================
</TABLE>


       Income tax expense differed from "expected" amounts, computed by applying
       the U.S. Federal income tax rate of 34 percent to income before income
       tax expense, as a result of the following:


                                                                     (Continued)

                                       29
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                         ---------------------------------------------------------
                                                                               2000                 1999               1998
                                                                         -----------------   -----------------  ------------------
<S>                                                                       <C>                <C>                  <C>
"Expected" income tax expense                                             $      1,252               1,101                 873
Increase (reduction) in income tax expense
    resulting from:
       Tax-exempt interest income                                                  (77)                (89)               (116)
       Nondeductible interest expense                                               12                  13                  16
       Other, net                                                                   23                  (5)                  4
                                                                         -----------------   -----------------  ------------------
                  Reported income tax expense                         $          1,210               1,020                 777
                                                                         =================   =================  ==================
</TABLE>

       The tax effects of temporary differences that give rise to significant
       portions of the deferred tax assets and deferred tax liabilities are as
       follows:


<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                           -------------------------------------
                                                                                                 2000               1999
                                                                                           -----------------  ------------------
<S>                                                                                        <C>                 <C>
Deferred tax assets:
    Loans, principally due to allowance for loan losses                                     $        412                 409
    Net unrealized losses on available-for-sale securities                                            44                 108
    Other                                                                                             14                  17
                                                                                           -----------------  ------------------
                              Total gross deferred tax assets                                        470                 534
Less valuation allowance                                                                             --                  --
                                                                                           -----------------  ------------------
                              Net deferred tax assets                                                470                 534
                                                                                           -----------------  ------------------
Deferred tax liabilities:
    Bank premises and equipment, principally due to
       differences in depreciation and amortization                                                   (70)                (45)
    Loans, due to net unearned fees                                                                   (92)                (21)
    Securities, due to differences in discount accretion                                               (4)                 (8)
    Prepaid expenses, due to deduction for tax purposes                                               (12)                (11)
                                                                                           -----------------  ------------------
                              Total gross deferred tax liabilities                                   (178)                (85)
                                                                                           -----------------  ------------------
                              Net deferred tax asset, included in other assets               $        292                  449
                                                                                           =================  ==================
</TABLE>


       The Company has determined that a valuation allowance for the gross
       deferred tax assets is not necessary at December 31, 2000 and 1999, since
       realization of the gross deferred tax assets can be supported by the
       amounts of taxes paid during the carryback period available under current
       tax laws.

                                                                     (Continued)

                                       30
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


(11)   Employee Stock Option Plan

       The Company sponsors an Employee Stock Option Plan ("the Plan") to give
       directors, officers and employees (collectively referred to as employees)
       an opportunity to acquire shares of the common stock of the Company to
       provide an incentive for employees to continue to promote the best
       interests of the Company and enhance its long-term performance, and to
       provide an incentive for employees to join or remain with the Company.
       Under the Plan, stock options may be granted at not less than the fair
       market value of Bankshares' common stock on the date of grant. Stock
       options granted under the plan are exercisable in July of each year in
       ratable installments over the option period which expires in 2002. Any
       options not exercised as permitted are forfeited. A change of control,
       merger, consolidation, dissolution or liquidation of the Company will
       result in employees holding stock options being given thirty days to
       exercise their unexercised stock options without regard to installment
       exercise limitations. Stock option data has been adjusted to reflect the
       Company's stock dividends.

       At December 31, 2000, there were 72,010 additional shares available for
       grant under the Plan. The per share weighted-average fair value of stock
       options granted during 2000, 1999 and 1998 was $3.00, $3.35 and $4.16,
       respectively, on the date of grant using the Black Scholes option-pricing
       model with the following weighted-average assumptions: 2000 - expected
       cash dividend yield 3.6 percent, risk-free interest rate of 6.5, expected
       volatility of 41 percent and an expected life in ratable installments
       over the option period which expires in July 2002; 1999 - expected cash
       dividend yield 2.2 percent, risk-free interest rate of 6.0 percent,
       expected volatility of 32 percent and an expected life in ratable
       installments over the option period which expires in July 2002; 1998 -
       expected cash dividend yield 2.2 percent, risk-free interest rate of 6.0
       percent, expected volatility of 32 percent and an expected life in
       ratable installments over the option period which expires in July 2002.

       The Company applies APB Opinion No. 25 in accounting for its Plan and,
       accordingly, no compensation cost has been recognized for its stock
       options in the consolidated financial statements. Had compensation cost
       for the Company's Plan been determined consistent with Statement 123, the
       Company's net income and net income per share would have been reduced to
       the pro forma amounts indicated as follows:

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                  -----------------------------------------------------------
                                                                        2000                  1999              1998
                                                                  ------------------   -------------------  -----------------
<S>                                                               <C>                  <C>                   <C>
Net income:
    As reported                                                    $       2,472                 2,219              1,791
                                                                  ==================   ===================  =================
    Pro forma                                                      $       2,432                 2,177              1,763
                                                                  ==================   ===================  =================
Net income per share:
    As reported                                                    $        1.55                  1.40               1.14
                                                                  ==================   ===================  =================
    Pro forma                                                      $        1.53                  1.38               1.12
                                                                  ==================   ===================  =================
</TABLE>


                                                                     (Continued)

                                       31
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)

<TABLE>
<CAPTION>

                                                                                     Years Ended December 31,
                                                                  -----------------------------------------------------------
                                                                         2000                  1999              1998
                                                                  ------------------   -------------------  -----------------
<S>                                                               <C>                   <C>                  <C>
Net income per share - assuming dilution:

    As reported                                                     $     1.54                  1.38               1.11
                                                                  ==================   ===================  =================
    Pro forma                                                       $     1.52                  1.36               1.10
                                                                  ==================   ===================  =================
</TABLE>

       Pro forma net income reflects only options granted since January 1, 1995.
       Therefore, the full impact of calculating compensation cost for stock
       options under Statement 123 is not reflected in the pro forma net income
       amounts presented above because compensation cost is reflected over the
       option period which expires in July 2002, and compensation cost for
       options granted prior to January 1, 1995 is not considered.

       Stock option activity during the periods indicated is as follows:


<TABLE>
<CAPTION>
                                                                                                              Weighted
                                                                                  Number of                   Average
                                                                                   Shares                  Exercise Price
                                                                           ------------------------    -----------------------
<S>                                                                         <C>                        <C>
Balance at December 31, 1997 (number and weighted average
    exercise price of options exercisable - 20,035 at $10.47)                      100,351                       $10.47

    Granted                                                                         15,748                        18.95
    Exercised                                                                      (10,810)                        9.02
    Forfeited                                                                      (15,056)                       13.38
    Expired                                                                         (9,142)                       13.52
                                                                           ------------------------
Balance at December 31, 1998 (number and weighted average
    exercise price of options exercisable - 20,228 at $11.46)                       81,091                        11.46

    Granted                                                                         17,306                        17.65
    Exercised                                                                      (10,250)                        8.98
    Forfeited                                                                       (5,230)                       15.27
    Expired                                                                        (10,569)                       14.48
                                                                           ------------------------
Balance at December 31, 1999 (number and weighted average
    exercise price of options exercisable - 24,084 at $12.58)                       72,348                        12.57
</TABLE>


                                                                     (Continued)

                                       32
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)

<TABLE>
<CAPTION>
                                                                                                            Weighted
                                                                                 Number of                   Average
                                                                                   Shares                  Exercise Price
                                                                           ------------------------    -----------------------
    <S>                                                                     <C>                         <C>
    Granted                                                                          15,600                  $14.42
    Exercised                                                                       (10,316)                   8.85
    Forfeited                                                                        (8,733)                  14.52
    Expired                                                                         (14,386)                  15.31
                                                                           ------------------------
Balance at December 31, 2000 (number and weighted average
    exercise price of options exercisable - 27,239 at $12.78)                        54,513                  $12.78
                                                                           ========================
</TABLE>

       At December 31, 2000, the range of exercise prices and weighted average
       remaining contractual life of outstanding options was $8.00 to $20.25 and
       1.5 years, respectively.

(12)   Dividend Restrictions and Capital Requirements

       Bankshares' principal source of funds for dividend payments is dividends
       received from its subsidiary bank. For the year ended December 31, 2000,
       dividends from the Bank totaled $779.

       Substantially all of Bankshares' retained earnings consists of
       undistributed earnings of its subsidiary bank, which are restricted by
       various regulations administered by federal banking regulatory agencies.
       Under applicable federal laws, the Comptroller of the Currency restricts,
       without prior approval, the total dividend payments of the Bank in any
       calendar year to the net profits of that year, as defined, combined with
       the retained net profits for the two preceding years. At December 31,
       2000, retained net profits of the Bank which were free of such
       restriction approximated $2,614.

       Bankshares and the Bank are subject to various regulatory capital
       requirements administered by the federal banking agencies. Failure to
       meet minimum capital requirements can initiate certain mandatory and
       possibly additional discretionary actions by regulators that, if
       undertaken, could have a direct material effect on the Company's
       consolidated financial statements. Under capital adequacy guidelines and
       the regulatory framework for prompt corrective action, Bankshares and the
       Bank must meet specific capital guidelines that involve quantitative
       measures of their assets, liabilities and certain off-balance-sheet items
       as calculated under regulatory accounting practices. Bankshares and the
       Bank's capital amounts and classification are also subject to qualitative
       judgments by the regulators about components, risk weightings and other
       factors.

       Quantitative measures established by regulation to ensure capital
       adequacy require Bankshares and the Bank to maintain minimum amounts and
       ratios (set forth in the table below) of total and Tier 1 capital (as
       defined in the regulations) to risk-weighted assets (as defined), and of
       Tier 1 capital (as defined) to average assets (as defined). Management
       believes, as of December 31, 2000, that Bankshares and the Bank meet all
       capital adequacy requirements to which they are subject.



                                                                     (Continued)

                                       33
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)

       As of December 31, 2000, the most recent notification from Office of the
       Comptroller of the Currency categorized Bankshares and the Bank as well
       capitalized under the regulatory framework for prompt corrective action.
       To be categorized as well capitalized, Bankshares and the Bank must
       maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
       ratios as set forth in the table below. There are no conditions or events
       since that notification that management believes have changed Bankshares
       and the Bank's category.

       Bankshares and the Bank's actual capital amounts and ratios are presented
       in the following table:

<TABLE>
<CAPTION>
                                                                                                                To Be Well
                                                                                                            Capitalized Under
                                                                                For Capital                 Prompt Corrective
                                                   Actual                   Adequacy Purposes               Action Provisions
                                       ----------------------------  -------------------------------  ------------------------------
                                           Amount          Ratio         Amount          Ratio            Amount           Ratio
                                       -------------- -------------  ---------------  --------------  -------------- ---------------
<S>                                    <C>            <C>            <C>              <C>              <C>            <C>
As of December 31, 2000:
    Total Capital
       (to Risk Weighted Assets):
          Bankshares consolidated       $  21,374           14.89%     $  11,487           *8.0%         $  N/A            N/A
          Bank                             21,601           15.04%        11,487           *8.0%          14,359          *10.0%
    Tier 1 Capital
       (to Risk Weighted Assets):
          Bankshares consolidated          19,845           13.82%         5,744           *4.0%            N/A            N/A
          Bank                             20,072           13.98%         5,744           *4.0%           8,616           *6.0%
    Tier 1 Capital (Leverage)
       (to Average Assets):
          Bankshares consolidated          19,845           10.03%         5,935           *3.0%            N/A            N/A
          Bank                             20,072           10.15%         5,935           *3.0%           9,891           *5.0%

As of December 31, 1999:
    Total Capital

       (to Risk Weighted Assets):
          Bank                          $  19,451           16.53%     $   9,416           *8.0%      $   11,770          *10.0%
    Tier 1 Capital
       (to Risk Weighted Assets):
          Bank                             18,047           15.33%         4,708           *4.0%           7,062           *6.0%
    Tier 1 Capital (Leverage)
       (to Average Assets):
          Bank                             18,047           10.16%         7,105           *3.0%           8,881           *5.0%
</TABLE>

* Greater than

(13)   Supplemental Cash Flow Information

       The Company paid $7,868, $6,338 and $5,618 for interest and $1,492, $738
       and $895 for income taxes, net of refunds received, for the years ended
       December 31, 2000, 1999 and 1998, respectively. Noncash investing
       activities included $177, $221 and $594 of loans transferred to
       foreclosed properties and $320, $276 and $390 of loans charged against
       the allowance for loan losses in 2000, 1999 and 1998, respectively.
       Noncash investing activities also included $188, $(248) and $13 of
       changes in net unrealized losses included in available-for-sale
       securities, $(64), $84 and $(5) of changes in deferred

                                                                     (Continued)

                                       34
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)



       tax assets included in other assets, and $124, $(164) and $8 of changes
       in net unrealized losses on available-for-sale securities, net of income
       taxes, included in stockholders' equity in 2000, 1999 and 1998,
       respectively.

(14)   Financial Instruments with Off-Balance-Sheet Risk

       The Bank is a party to financial instruments with off-balance-sheet risk
       in the normal course of business to meet the financing needs of its
       customers. These financial instruments include commitments to extend
       credit and standby letters of credit. Those instruments involve, to
       varying degrees, elements of credit risk in excess of the amount
       recognized in the consolidated balance sheets. The contract amounts of
       those instruments reflect the extent of involvement the Bank has in
       particular classes of financial instruments.

       The Bank's exposure to credit loss in the event of nonperformance by the
       other party to the financial instrument for commitments to extend credit
       and standby letters of credit is represented by the contractual amount of
       those instruments. The Bank uses the same credit policies in making
       commitments and conditional obligations as it does for on-balance-sheet
       instruments.

       The Bank generally requires collateral or other security to support the
       following financial instruments with credit risk:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                   -------------------------------------
                                                         2000                1999
                                                   -----------------   -----------------
                                                               Contract Amounts
                                                   -------------------------------------
<S>                                                 <C>                  <C>
Financial instruments whose contract amounts
   represent credit risk:
       Commitments to extend credit                 $     15,045              16,048
                                                   =================   =================
       Standby letters of credit                    $      2,073               1,992
                                                   =================   =================
</TABLE>


       Commitments to extend credit are agreements to lend to a customer as long
       as there is no violation of any condition established in the contract.
       Commitments to extend credit consist of construction loans ($6,676 at
       December 31, 2000) which have a fixed rate but a duration of generally
       less than one year. The remainder ($8,369 at December 31, 2000)
       represents generally variable rate lines of credit that renew annually.
       Commitments generally have fixed expiration dates or other termination
       clauses and may require payment of a fee. Since many of the commitments
       are expected to expire without being drawn upon, the total commitment
       amounts do not necessarily represent future cash requirements. The Bank
       evaluates each customer's creditworthiness on a case-by-case basis. The
       amount of collateral obtained, if deemed necessary by the Bank upon
       extension of credit, is based on management's credit evaluation of the
       customer. Collateral held varies but may include marketable securities,
       accounts receivable, inventory, property, plant and equipment, and
       income-producing commercial properties.


                                                                     (Continued)

                                       35
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)

       Standby letters of credit are conditional commitments issued by the Bank
       to guarantee the performance of a customer to a third party. Those
       guarantees are primarily issued to support private borrowing
       arrangements. The credit risk involved in issuing standby letters of
       credit is generally less than that involved in extending loans to
       customers because the Bank generally holds deposits equal to the
       commitment.

       The Bank originates mortgage loans for sale to secondary market investors
       subject to contractually specified and limited recourse provisions. In
       2000, the Bank originated $10,477 of mortgage loans and sold $10,684 to
       investors, compared to $15,076 originated and $16,632 sold in 1999. Every
       contract with each investor contains certain recourse language. In
       general, the Bank may be required to repurchase a previously sold
       mortgage loan if there is major noncompliance with defined loan
       origination or documentation standards, including fraud, negligence or
       material misstatement in the loan documents. Repurchase may also be
       required if necessary governmental loan guarantees are cancelled or never
       issued, or if an investor is forced to buy back a loan after it has been
       resold as a part of a loan pool. In addition, the Bank may have an
       obligation to repurchase a loan if the mortgagor has defaulted early in
       the loan term. This potential default period is for a period of twelve
       months after sale of a loan to the investor. Sold loans with potential
       recourse totaled approximately $10,684 at December 31, 2000 and $16,632
       at December 31, 1999.

(15)   Concentrations of Credit Risk

       The Bank's primary business activity is centered primarily in the City of
       Salem, but extends throughout the Roanoke Valley. Accordingly, operating
       results are closely correlated with the economic trends within this
       service area. The City of Salem has a diverse economy, including a
       variety of manufacturing and service industries. The ultimate
       collectibility of the loan portfolios and the recovery of the carrying
       amounts of foreclosed properties are susceptible to changes in the market
       conditions of this area.

       The Bank has established operating policies relating to the credit
       process and collateral in loan originations. Loans to purchase real and
       personal property are generally collateralized by the related property
       with loan amounts established based on certain percentage limitations of
       the property's total stated or appraised value. Credit approval is
       primarily a function of the evaluation of the creditworthiness of the
       individual borrower or project based on available financial information
       and collateral. The commercial loan portfolio is diversified with no
       significant concentrations of credit. The consumer loan portfolio
       contains loans to individuals for household, family and other personal
       expenditures. At December 31, 2000 and 1999, the real estate loan
       portfolio contains approximately $16,000 and $15,000, respectively, of
       loans for construction and land development, approximately $39,000 and
       $37,000, respectively, of loans collateralized by 1-4 family residential
       properties and approximately $37,000 and $35,000, respectively, of loans
       collateralized by nonfarm, nonresidential properties.


                                                                     (Continued)

                                       36
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)

(16)   Leases

       The Company, as lessee, is obligated under various noncancellable
       operating leases for its premises. Future minimum lease payments, by year
       and in the aggregate, under operating leases that have initial or
       remaining lease terms in excess of one year as of December 31, 2000 are
       as follows:

               Years Ending December 31,
               2001                                  $    137
               2002                                       179
               2003                                       155
               2004                                       149
               2005                                       133
               Thereafter                                 238
                                                     ----------
                   Total minimum lease payments      $    991
                                                     ==========



       The operating leases generally provide for contingent rentals based on
       any increase in real estate taxes or other governmental assessments. Rent
       expense was approximately $174, $152 and $148 for the years ended
       December 31, 2000, 1999 and 1998, respectively.

(17)   Fair Value of Financial Instruments

       The estimated fair values of the Company's financial instruments are as
       follows:


<TABLE>
<CAPTION>
                                                                                          December 31,
                                                    -------------------------------------------------------------------------------
                                                                      2000                                    1999
                                                    -----------------------------------------  ------------------------------------
                                                                             Estimated                             Estimated
                                                       Carrying                Fair              Carrying            Fair
                                                        Amount                 Value              Amount             Value
                                                    -------------------  --------------------  -----------------  -----------------
<S>                                                  <C>                  <C>                  <C>                  <C>
Financial assets:
    Cash and due from banks                          $        8,283                 8,283              8,959              8,959
    Federal funds sold and
       securities purchased
       under resale agreements                               12,310                12,310                --                 --
    Securities                                               48,453                47,653             50,832             47,931
    Mortgage loans held for sale                                139                   139                346                346
    Loans, net                                              138,048               137,999            115,593            118,597
                                                    -------------------  --------------------  -----------------  -----------------
                      Total financial assets         $      207,233               206,384            175,730            175,833
                                                    ===================  ====================  =================  =================
</TABLE>


                                                                     (continued)

                                       37
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
                 Years Ended December 31, 2000, 1999 and 1998
               (In Thousands, Except Shares and Per Share Data)


<TABLE>
<CAPTION>
                                                                                       December 31,
                                                    --------------------------------------------------------------------------------
                                                                  2000                                      1999
                                                    -----------------------------------------  -------------------------------------
                                                                               Estimated                               Estimated
                                                          Carrying               Fair               Carrying             Fair
                                                           Amount                Value               Amount              Value
                                                    -------------------  --------------------  -----------------  ------------------
<S>                                                  <C>                  <C>                    <C>               <C>
Financial liabilities:
    Deposits                                         $        180,983              182,707             156,864             156,614
    Federal funds purchased and
       securities sold under resale
       agreements                                                  --                   --                 145                 145
    Federal Home Loan Bank advances                                --                   --               4,100               4,100
    Federal Home Loan Bank long-term
       debt                                                    10,000               10,000                  --                  --
                                                    -------------------  --------------------  -----------------  ------------------
                 Total financial liabilities         $        190,983              192,707             161,109             160,859
                                                    ===================  ====================  =================  ==================
</TABLE>

       Fair value estimates are made at a specific point in time, based on
       relevant market information and information about the financial
       instrument. These estimates do not reflect any premium or discount that
       could result from offering for sale at one time the Company's entire
       holdings of a particular financial instrument. Because no market exists
       for a significant portion of the Company's financial instruments, fair
       value estimates are based on judgments regarding future expected loss
       experience, current economic conditions, risk characteristics of various
       financial instruments and other factors. These estimates are subjective
       in nature and involve uncertainties and matters of significant judgment
       and therefore cannot be determined with precision. Changes in assumptions
       could significantly affect these estimates.

       Fair value estimates are based on existing on and off-balance sheet
       financial instruments without attempting to estimate the value of
       anticipated future business and the value of assets and liabilities that
       are not considered financial instruments. Significant assets that are not
       considered financial assets include deferred tax assets and bank premises
       and equipment. In addition, the tax ramifications related to the
       realization of the unrealized gains and losses can have a significant
       effect on fair value estimates and have not been considered in the
       estimates.

                                                                     (Continued)

                                       38
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 2000, 1999 and 1998
                (In Thousands, Except Shares and Per Share Data)



(18)   Parent Company Financial Information

       Condensed financial information of Bankshares (Parent) is presented
below.

                                  Condensed Balance Sheets

<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                          ------------------------------------------
                                                                                               2000                    1999
                                                                                          -------------------  ---------------------
<S>                                                                                       <C>                  <C>
Assets

Investment in subsidiary, at equity                                                       $        19,983                 17,837
                                                                                          ===================  =====================
Liabilities and Stockholders' Equity

Other liabilities, including $218 due to subsidiary                                                   224                    --

Stockholders' equity:
    Common stock and surplus, no par value in 2000 and par value of $5.00 in
       1999. Authorized 10,000,000 shares in 2000 and 2,000,000 in 1999; issued
       and outstanding 1,596,873 shares in
       2000 and 1,526,067 shares in 1999                                                           17,079                 16,077
    Retained earnings                                                                               2,766                  1,970
    Accumulated other comprehensive loss                                                              (86)                  (210)
                                                                                          -------------------  ---------------------
                                    Total stockholders' equity                                     19,759                 17,837

Commitments, contingencies and other matters
                                                                                          -------------------  ---------------------
                                    Total liabilities and stockholders' equity            $        19,983                 17,837
                                                                                          ===================  =====================
</TABLE>

                                       39
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 2000, 1999 and 1998
                (In Thousands, Except Shares and Per Share Data)

                    Condensed Statements of Income and Comprehensive Income

<TABLE>
<CAPTION>
                                                                                            Years ended
                                                                                            December 31,
                                                                          -------------------------------------------------
                                                                                   2000                       1999
                                                                          -----------------------     ---------------------
<S>                                                                       <C>                         <C>
Income

Dividends from subsidiary                                                 $               779                       --

Expenses

Other expenses                                                                            306                       --
                                                                          -----------------------     ---------------------
                   Income before income tax benefit and equity
                      in undistributed net income of subsidiary                           473                       --

Income tax benefit                                                                         82                       --
                                                                          -----------------------     ---------------------
                   Income before equity in undistributed net
                      income of subsidiary                                                555                       --

Equity in undistributed net income of subsidiary                                        1,917                     2,219
                                                                          -----------------------     ---------------------
                   Net income                                                           2,472                     2,219
                                                                          -----------------------     ---------------------
Equity in other comprehensive income (loss), net of income tax expense
    (benefit):

       Net unrealized gains (losses) on securities available-for-sale                     124                      (164)
                                                                          -----------------------     ---------------------
                   Comprehensive income                                   $             2,596                     2,055
                                                                          =======================     =====================
</TABLE>

                                       40
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 2000, 1999 and 1998
                (In Thousands, Except Shares and Per Share Data)

                             Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                      Years ended
                                                                                                      December 31,
                                                                                       ---------------------------------------------
                                                                                               2000                    1999
                                                                                       ---------------------   ---------------------
<S>                                                                                  <C>                       <C>
Cash Flows from Operating Activities

Net income                                                                           $             2,472                   2,219
Adjustments to reconcile net income to net cash provided by
    operating activities:
       Equity in undistributed net income of subsidiary                                           (1,917)                 (2,219)
       Increase in other liabilities                                                                 224                     --
                                                                                       ---------------------   ---------------------
                              Net cash provided by operating activities                              779                     --
                                                                                       ---------------------   ---------------------
Cash Flows from Financing Activities

Cash dividends paid                                                                                  779                     --
                                                                                       ---------------------   ---------------------
Net increase in cash                                                                                 --                      --
Cash, beginning of year                                                                              --                      --
                                                                                       ---------------------   ---------------------
Cash, end of year                                                                    $               --                      --
                                                                                       =====================   =====================
</TABLE>

                                       41
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                                    Directors
                                      2000


Salem Community Bankshares, Inc.

Dr. Eugene M. Bane, Jr., Doctor of Optometry
Truman R. Dorton, C.P.A., Dorton & Gooch, C.P.A.s.
Morris A. Elam, Retired Owner, Morris Elam Electric
H. Morgan Griffith, Attorney at Law; Representative, Virginia House of Delegates
Rose M. Hagen, C.P.A., Financial Division Manager, Allstate Insurance Company
Carlos B. Hart, President, Hart Motor Company
Dr. Walter A. Hunt (Chairman), Retired Superintendent, City of Salem Schools
Gladys C. O'Brien, Vice President, O'Brien Meats
Clark Owen, Jr., President and Chief Executive Officer, Salem Bank and Trust,
                 National Association
Carl E. Tarpley, Jr., Executive Vice President, Salem Bank and Trust, National
                      Association


Salem Bank and Trust, National Association

Dr. Eugene M. Bane, Jr., Doctor of Optometry
Truman R. Dorton, C.P.A., Dorton & Gooch, C.P.A.s.
Morris A. Elam, Retired Owner, Morris Elam Electric

H. Morgan Griffith, Attorney at Law; Representative, Virginia House of Delegates
Rose M. Hagen, C.P.A., Financial Division Manager, Allstate Insurance Company
Carlos B. Hart, President, Hart Motor Company
Dr. Walter A. Hunt (Chairman), Retired Superintendent, City of Salem Schools
Gladys C. O'Brien, Vice President, O'Brien Meats
Clark Owen, Jr., President and Chief Executive Officer, Salem Bank and Trust,
                 National Association

                                       42
<PAGE>

                SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                                   Officers
                                     2000

Salem Community Bankshares, Inc.

Clark Owen, Jr., President and Chief Executive Officer
Carl E. Tarpley, Jr., Treasurer
Gill R. Roseberry, Corporate Secretary and Chief Financial Officer

Salem Bank and Trust, National Association

Clark Owen, Jr., President and Chief Executive Officer
Carl E. Tarpley, Jr., Executive Vice President
Gill R. Roseberry, Senior Vice President and Cashier
Charles W. Maness, Jr., Senior Vice President
C. Donald Bedwell, Vice President/Branch Manager
Paul T. Coleman, Vice President/Dealer Finance
Andrew F. Hoback, Vice President/Branch Manager
J. Peter Jessee, Vice President/Commercial Loans
Pamela O. Jones, Vice President/Loan Administration
Elizabeth C. Koehler, Vice President/Information Systems
Frankye D. Shropshire, Vice President/Operations
James W. Barnes, Assistant Vice President/Collections and Recovery Manager
J. Chris Conner, Assistant Vice President/Mortgage Loans
Nelson L. Prillaman, Jr., Assistant Vice President/Credit Administration
Patricia A. Wade, Assistant Vice President/Loan Operations
Catherine N. Justice, Auditor
Dianne Arant, Bookkeeping Manager
Debra Assenat, Branch Manager
Claudia Stanley, Branch Manager
Teresa A. Bland, Compliance Officer
Peggy Blankenship, Manager, Secondary Market Department
Gloria J. Brauch, Bankcard Officer
Kim J. Ferguson, Consumer Loan Officer
Tammy J. Lewis, Assistant Branch Manager
Carolee Ogle, Branch Operations Officer
Laura Perdue, Real Estate Loan Officer
Dave Vaught, Real Estate Loan Officer
Stephanie Stewart, Real Estate Loan Officer
Karan Baldwin-Bryant, Administrative Assistant
Melissa Coleman, Administrative Assistant
Pat Leonard, Administrative Assistant
Lisa Linkenhoker, Administrative Assistant
Jean Lucas, Administrative Assistant
Sherry Simmons, Administrative Assistant
Lucinda Welsh, Administrative Assistant
Rose Wimmer, Administrative Assistant
Corinna S. Witt, Administrative Assistant

                                       43
<PAGE>

                 SALEM COMMUNITY BANKSHARES, INC. AND SUBSIDIARY
                                      Staff
                                      2000


Salem Bank and Trust, National Association

Beth Allen                                                       Tiffeny Inscoe
Shirley Barnes                                                  Melinda Johnson
Emily Bennett                                                      Mary Justice
Kathy Blankenship                                              Elizabeth Kavitz
Katherine Bohon                                                    Cassie Klenk
Teresa Boynton                                                    Carol Lawhorn
Charisse Brewer                                              Kimberley Lawrence
Janine Brizendine                                                Teresa McLaren
Tracy Brogan                                                       Lesa Meadows
Jennifer Brown                                                Chasity Neighbors
Nancy Brubaker                                                      Dee Nichols
Charmaine Bush                                                    Judy Pandozzi
Robert Caudle                                                       Payal Patel
Brenda Cooper                                                      Heather Reed
Lesley Craig                                                      Mary Reynolds
Brooke Dickerson                                            Michelle Richardson
Kathy Edwards                                                   Heather Roberts
Delorese Ferguson                                              Cathy Rotenberry
Kim Fisher                                                        Janice Rucker
Kimberly Gaking                                                  Marilyn Shelor
Deborah Galloway                                                Margaret Sisson
Wendy Gates                                                        Amanda Smith
Mandie Haley                                                        Paula Smith
Ruth Hall                                                         Pam Stalnaker
James Hamilton                                                     Cynthia Taft
Amy Harrell                                                     Michele Vanover
Lee Ann Harris                                                     Jean Walters
Robin Hatcher                                                     Amanda Willis
Gina Hendrickson                                                    Donna Young
Diane Holdridge

                                       44